10/28/10

TARIFF AND NON TARIFF

BARRIERS
1 Prepared by: Ashish Juneja

For SIMT KashipurThursday, October 28, 2010

PROTECTIONISM

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 Main feature of international trading environment is
Proliferation of trade barriers

 world tariff average in manufacturing countries has gone

down to level of 40 percent in 1947, 3 percent in
industrial countries

 Developed countries have been replaced by growing

protectionism

 Reasons attributed to protectionism-currency crisis,

recession and high unemployment and trade deficit
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ARGUMENTS IN FAVOR OF
PROTECTION

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 Protection of infant industry
 Diversification of economic activities
 Improving terms of trade
 Improving balance of payments
 Anti-dumping measure
 Bargaining
 Employment protection
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ARGUMENTS IN FAVOR OF
PROTECTION (CONTD.)

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 Employment protection
 National defense
 Key industry
 Strategic trade policy
 Keeping money at home
 The pauper labor
 Size of home market
 Equalization of cost of production
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DEMERITS OF PROTECTION

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 Against interest of consumers
 Protection makes producers less quality
conscious
 Encourage domestic monopoly

 Secure under protection and discourage

motivation
 Corruption

 Reduces volume of trade

 Uneconomic utilization of resources

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 METHODS OF PROTECTION

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 Tariff Barriers

 Non-Tariff Barriers

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 TARIFF BARRIERS

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 Tariff in international trade refers to the taxes or
duties imposed on goods when they cross
international borders.
 Tariff rates are generally high in developing
countries.
 With liberalization tariff rates have reduced and
NTBs are part of trade liberalization.
 Economists and organizations like WTO prefer
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tariff to Non Tariff Barriers
 Impact of a Tariff on Steel
S + Tariff
Price of Steel S
(US $ per kg)

28 Amount of the tariff per unit

20

350 500 Quantity of Steel Bought and

Sold from Abroad
NON-TARIFF BARRIERS

 Any methods not covered by a tariff,

most usually:
 Rules
 Regulations
 Voluntary Export Restraints (VERs)
 Legislation
 Exacting Standards or Specifications
NON-TARIFF BARRIERS
 Examples include setting exacting standards
on fuel emissions from cars, the
documentation required to be able to sell
drugs in different countries, the ingredients
in products – some of which may be banned
in the destination country
 NTBs are difficult to prove – when do you
accuse a country of protectionism –
could be a legal or cultural issue?
 The main method involved in NTBs is not
to prevent trade but to make the cost of
doing so prohibitive to the potential exporter
REASONS

 Protect domestic industries

 Protect domestic employment

 Strategic reasons

 Political pressures

 Protect culture?

 Prevent ‘Dumping’ – selling goods

in the destination country below cost
to break into that market
 Impact of a Quota on Steel
Price of Steel Quota S
(US $ per Kg)
level
The
Pre-trade
quota restricts
30 the
position
supplybefore
to a set
amount
a quota.(250
in the example)
which is likely
to result in a
20 shortage of this
good and
a subsequent rise
in its price.

250 500 Quantity of Steel Bought and

Sold from Abroad
NON TARIFF BARRIERS AND NEW
PROTECTIONISM

Introduction
•Since the birth of GATT, in 1947,
tariffs have been negotiated
downwards
•New measures of protection such
as import quotas, voluntary export
restraints and anti-dumping
actions have come in.
 IMPORT QUOTAS
 Quota- quantitative restriction on the
amount of a commodity to be
imported/exported.
 Effects of a Quota.-used usually to
protect, domestic industry or for BOP
reasons
PARTIAL EQUILIBRIUM EFFECTS
-QUOTA
QUOTA

 Before Quota
-Nation consumes 70X(AB), 10X(AC)
produced domestically and 60X
imported(CB) is imported
Quota
-Imposition of an import quota of 30X(JH)
raises, the price to $2 so that Demand can
match 20X domestically produced
plus30X(JH), allowed by the imposition of a
quota
-Consumption is reduced by 20X and
domestic pdn is increased by 10X.
TARIFF & QOUTA

 With a given import quota, increase in dd will result

in higher domestic prices than an equivalent tariff
 Also with a given import tariff an increase in dd will
not change domestic price and pdn, but results in
higher consumption and imports than quota
 Involves distribution of import licenses, which may
result in rent seeking and monopoly profits
 Quota-limits imports to specific levels, while trade
effect of a tariff is uncertain.
 OTHER NON-TARIFF BARRIERS
 1.Voluntary export restraint (VER)- Negotiated
settlement, e.g in clothing, steel
 2.Technical, Administrative and other Regulations

 Safety regulations-automobile and electrical

 Health regulations-food

 Labeling regulations-showing origin and contents

 Procurement policies

 Border taxes-rebates of internal taxes given to

exporters of a commodity
 International commodity agreements and multiple
exchange rates.
 INTERNATIONAL CARTEL
 International agreement in the restriction of
output and exports among countries. E.g
OPEC.
DUMPING

 It is the sale of a commodity at below cost or at least the

sale of a commodity at a lower price abroad than
domestically
 Examples

 Persistent Dumping-continuous tendency of monopolist

selling a product more expensive in a domestic market
than international(face competition)
 Predatory-selling cheaply abroad to drive out local
producers and raise prices after death of local industry.
 Sporadic-once off to off load unexpected production
EXPORT SUBSIDIES
 Direct payments to nation exporters/ low
interest loans to boost nation exports.
 Form of dumping
IF A SUBSIDY IS IMPOSED, DOMESTIC CONSUMERS
SUFFER AS DOMESTIC PRICES RISE FROM 3.5 TO 4
AFTER IMPOSITION OF A EXPORT SUBSIDY
GATT
 General Agreement on Tariffs and
Trade
 Created to promote free trade

 Principles included, non

discrimination,elimination of non tariff
trade barriers,consultation among
nations to resolve trade disputes,
 Many other meetings followed
including Tokyo Round,Uruguay
Round , Marrakech Agreement
 URUGUAY ROUND-1993
 Focused on Tariffs
 1-Qouta
 2-Anti-dumping
 Subsidies
 Safeguards
 Intellectual property
 Services
 Other Industry Provisions
 Trade related investment measures
 WTO.
TRADE LIBERALISATION
TRADE LIBERALISATION
 Aims to free up world trade
and break down the barriers
to international trade
 Basic philosophy rests on the principle of
comparative advantage
 Talks to achieve trade liberalisation have
been ongoing for many years
TRADE LIBERALISATION
 GATT – General Agreement on Tariffs
and Trade
 First signed in 1947 –
talks on-going since then!
 Uruguay Round 1994 – set up the World
Trade Organisation (WTO) as well as
agreements covering a range of trade
liberalisation measures
 WTO provides the forum through which trade
issues can be negotiated and works to help
implement and police trade agreements
TRADE LIBERALISATION
 Potential benefits:
 Promotes international specialisation
and increases world output
 Promotes efficient use and allocation
of world resources
 Allows developing countries access to the heavily
protected markets of the developed world thus helping
promote development
 Facilitates the working of the international market system
and the working of price signals to ensure efficient
allocation
of resources, international competition
and the associated benefits to all
TRADE LIBERALISATION
 World agreements are very difficult to
achieve
 Witness the issues
over the removal or reduction
of agricultural subsidies, tariffs
on steel in the United States,
the banana wars, etc!